The euphoria surrounding penny stocks among rookie, retail investors in India is frantic.
Indian investors are often attracted to penny stocks because their stock prices are low and can be purchased in bulk.
But that’s a problem, because penny stocks are the highly volatile and risky asset class that has rendered many investors useless over the years.
However, there are some cases where penny stocks are also known for generating multiple bagger profits.
If you’re planning to invest in penny stocks, don’t worry, we’ve got you covered.
To help you with this, we reached out to penny stocks expert Rahul Shah, for instructions on how to invest in penny stocks.
This interview is a must read if you are really serious about making money from penny stocks…
Equitymaster – Congratulations on the incredible achievement you’ve built microcapsules in the past 7 years. What’s the secret to beating BSE Sensex with 2x margin?
Rahul – Thank you very much. It reaffirms my belief in the philosophy that to be a successful investor one does not need superior intelligence, unusual business insights, or inside information.
All one needs is a sound blueprint to make decisions and the ability to keep emotions from spoiling this blueprint.
Equitymaster – Another area where you’ve been a frontrunner is penny stocks. What do you think of the skepticism towards penny stocks investing in Indian stock market?
Rahul – I think the skepticism is justified to a certain extent.
As a group, penny stocks have certainly destroyed more shareholder wealth than any other group outside of the market.
But the opposite is also true.
If you buy the right penny stocks at the right time, the upside potential can be huge.
So it all ends up separating the coin stock men from the boys. We need to have a process in place to shrink those penny stocks whose upside potential benefits investors.
Equitymaster – Over the years you have shown how to make money with penny stocks. Its a lot! Can you share a few tips on choosing the right penny stocks?
Rahul – In penny stock investing, it is very important to distinguish between penny stocks are worth investing in and highly speculative ones. We have developed an in-house system that can do this with a very good success rate.
We call this the SOLID framework for investing in penny stocks. Here S stands for strong balance sheet, O for Owner Operator, L for long term business viability, I for Income Generation and D for deeply discounted valuation.
In summary, we do not recommend a penny stock that does not qualify on all of the above parameters. It is the strict adherence to this system that has allowed our subscribers to make good money on penny stocks over the years.
Equitymaster – As someone who has studied market cycles for decades, how do you read the situation today? How should investors take this factor into account when making investment decisions.
Rahul – Investors need to understand that penny stocks gain the most during a bull market and also fall the most during a bear market. Therefore, the right time to invest in them is at the start of a bull market and the worst time is when it is close to its all-time high.
Most investors do the opposite and this is the number one reason why investors become disillusioned with penny stocks.
In my view, now is not the time for maximum exposure to penny stocks as the market is already up more than 100% from its low.
Equitymaster – If you were using cash today, had a risk routine and a 3 year horizon, how would you allocate the money? Also, what role will penny stocks play in this? Let’s get Rs 100 cash…
Rahul – As I mentioned in my previous reply, the market has rallied more than 2x from its low. Therefore, this is not the time for maximum exposure to penny stocks.
If I have Rs 100 today and if I invest in penny stocks from 2-3 years point of view, I will probably only be exposed to 50% penny stocks or even as low as 25% and keep the rest in bonds or FDs.
Therefore, in the future when the market corrects, I could be exposed to as high as 75% overall specifically for penny stocks.
In my opinion, this is one of the best ways to maximize profits and minimize losses from a volatile space like penny stocks.
Equitymaster – You are always right to quote great investors like Benjamin Graham. Anything you want to share with us today…
Rahul – Graham once mentioned that the main loss to investors comes from buying low-quality securities at times when business conditions are favorable.
A lot of poor quality penny stocks can have a year or two where they make good returns.
Investors should not confuse this prosperity with safety and end up buying stocks.
They should always stick with stocks that have at least 5 years of tracking steady returns or growth or both and also have a good balance sheet. Otherwise, the risk of losing money in the penny stock space is very high.
Happy investing!
Disclaimer: This article is for informational purposes only. It is not a stock recommendation and should not be treated as such.
(This article is provided from Equitymaster.com)
(This story has not been edited by NDTV staff and was automatically generated from the feed provided.)
